CH 9: Stocks and their Valuation

if performance is poor and stockholders are dissatisfied, an outside group may solicit the proxies in an effort to overthrow management and take control of the business

proxy fight

transferring the rights to vote to another

proxy

another corporation attempts to take over by buying a majority of the outstanding stock

takeover

Who is primarily worried about takeovers and proxy fights?

Managers who own less than 50% of the stock

gives common shareholders the right to purchase, on a pro rata basis, new issues of common stock (for convertible securities), protecting them from dilution of value

preemptive rights

Ways management attempts to block takeovers: by convincing shareholders to ___

elect only 1/3 of directors each year
require 75%, rather than 50% of stockholders to approve merger
vote in a poison pill provision

allows stockholders to buy takeover firm’s shares at a reduced price

poison pill provision

stockholders do not want barriers to protect incompetent managers, so SEC

ruled in 1993 that large investors may work together to affect management’s decisions

What are the types of common stock

common shares
classified stock
founders shares

stock used to meet special needs; commonly used by small companies; allows different voting power to different types of this stock

classified stock

stock that is owned by the firms founders; sometimes called class B stock; enables founders to maintain control over the company without having majority of stock bc their stock allows them to have more votes per stock

founders shares

what are the types of corporations?

closely held corporations (NOT PUBLIC)
publicly owned corportations

first time stock is ever sold for a company is called

going public (IPO)

When investing in stock, purchase:

undervalued stock instead of overvalued

What are the two methods of stock valuation?

Cash flows (generic- used for any asset)
Discounted dividend model (for common stock specifically)

required rate of return of the common stockholder

ks

stock that pays dividends that never grow

perpetuity

Total Yield (TY) =

DY + CGY

When g is constant, then CGY=

g

DY1=

D1/P0

DY2=

D2/P1

CGY1=

P1-P0/P0

CGY2=

(P2-P1)/P1

Beta=

%mvmt stock / %mvmt Mkt

CAPM stands for

capital asset pricing model

SML stands for

Security market line

Required ks=

kRF (kM-kRF)(b)

what is the procedure to determine the equilibrium stock price?

use SML to calc required ks
then use kz in gordon model to calculate P0

finance guru that stated “underweight yourself in stocks” right as the tech bubble burst; values companies using the PE approach

Abbey Joseph Cohen (of Goldman Sachs)

What is the PE for all tech companies?

40x

what is preferred stock a hybrid of?

set dividend - like a bond (less risky)
infinite life- like stock (not as safe)

Preferred stock is a type of:

perpetuity